Is This the Succession Plan For You?

[Music] hello everyone welcome to the 21 hats podcast I'm your host Lauren Feldman this week Jay goz and special guests Peter kler and Jimmy calb discussed the hottest new thing in succession planning you may recall that earlier this year Peter was a guest on an episode in which he explained how he helped Laura Anderson sell her seafood restaurant to what's known as an employee ownership trust or a Perpetual purpose trust both Jay and Jimmy listened to that episode and were intrigued both had questions for Peter so we recorded a conversation in which we discuss what makes a business a good candidate for trust ownership the issues we addressed include is this only for businesses that have a save the world type of purpose how much does it cost to create an ownership trust can owners sell to a trust and still run the business as they wish and perhaps the biggest question of all what can go wrong even in Good Times owning and running a business can be a lonely Pursuit our hope is that these weekly conversations will let owners know they are not alone in facing challenges in fact that's the whole idea behind the 21 hats Community engaging with other owners to get the kinds of insights only another entrepreneur can offer if you're interested in learning more step one is to sign up for a free trial of the Morning Report which highlights the most important news of the day for business owners so you don't have to go looking for it step two is to get on our slack Channel where you can ask questions get vendor recommendations and tap the wisdom of a very impressive crowd just search the 21 hats Morning Report to subscribe joining me this week on the podcast are Jay gos CEO of the gos group whose companies in Chicago include a picture frame business artist frame service and a home furnishing store at Jason home Jimmy calb CEO of Triad components Group which is based in San Diego and manufactures electronic components and Peter curler founder of lumo group which is based in Portland Oregon and advises Mission driven businesses this episode is titled is this the succession plan for [Music] you welcome Jay Jimmy and Peter it's great to have you here as all of you know the past few years we've been exploring the options that owners have to transition both the ownership and the leadership of their businesses much of this exploration has TR Jay's attempts to figure out what he's going to do with his business in fact I think this may have all started with a conversation in which Jimmy helped introduce Jay to the basic Contours of an employee stock ownership plan so I'd like to start Peter um could you just imagine that Jay has knocked on your door to ask about uh employee ownership trusts how would you begin the process of determining whether he and his business are good candidates for an eot sure absolutely uh people do knock on my proverbial door uh you know a couple times a week these days and and so these are conversations I'm I'm used to having I love having so thank you Lauren for inviting me on to have this live um Jay I'm I'll ask you some questions I know that there may be limits to what you're comfortable sharing so just but Peter don't hesitate to ask anything you want to ask if Jay doesn't want to answer he doesn't have to I've the right to remain silent everything I say can am used to that drill yeah okay yeah great excellent um so just high level Jade uh just tell me about your business uh what it does what its purpose for existing is okay uh I started in picture framing it evolved into also a furniture store a wholesale frame a molding business where I sold other frame shops and an art business and got 130 employees and own all the real estate based in Chicago the reason I'm talking to you today is because I'm 68 I plan on working I have no interest in retiring but there is a reality there will come a day where i'm not going to be able to work or I you know just that's just the way it is and my kids are not really interested in taking it over so okay 130 employees you're 68 years old uh you're working what what's your role are you the CEO or do you have another role um I'm the CEO but I made I I made someone the president of the framing company in the wholesale business so I am not day-to-day doing day-to-day stuff I'm not dealing with customers I'm not dealing with vendors so I I am very much hands off okay but I still come in every day so I can talk to Lauren and stuff and Jimmy that kind of thing okay so sorry to be clear I think maybe I was confused all of these are separate businesses or they're all under the same they're all under the same legal umbrella but they're very much separate businesses and so when you're thinking about a transition plan you're thinking about it for all of these businesses yeah okay got it and might add I'm the biggest in the it's not like there's some strategic buyer out there that's waiting to buy me that I don't want I don't wouldn't do it anyway because I have no interest in retiring but it's not like I'm in the kind of industry that there's rollups going on everywhere and somebody's going to give me a big check for the business right okay that's helpful so and so what's the the current ownership structure are you the sole owner do you have any other shareholders sole owner and what's the corporate structure of these entities sub chapter S for all of them I only have one corporation that the others fall underneath I obviously could change that the buildings are all owned outside of the business so they're not got it part of the business okay interesting and what about other key leaders at the company you mentioned the president and and what about others like where are they at in their career Arc uh that's a good question they've been with me for 20 30 years and uh the key people I would say 16 60 one's 49 one's 48 one's 52 um so I certainly want to keep it going to at the very least till they retire and I would like to believe I'll be alive and com to work every day in 15 years you know I won't be 103 I'd be 83 so but as you know who knows yep who knows uh that that's true for anyone of any age uh how's the business doing financially um okay not you know High interest rates have slowed the furniture business down dramatically the entire industry is off but um it should be fine as soon as things get more normal and the framing industry's gotten mature the big growth days of framing are probably behind us but that's fine it's stable and the wholesale business is growing so it's a mixed bag I I can certainly tell you this I'm done entrepreneuring I'm done opening businesses I'm not pushing like I used to I just am perfectly happy to you know uh have a very moderate growth ratees fine I have absolutely no um desire or ambition to get back to the growing 10 15% of year thing yeah so moderate growth rate are the is the company currently profitable cash flow positive um probably it's a tricky business I have I've until I take inventory at the end of the year I'm never sure exactly how much I made but yeah I would say it's it's profitable it's certainly not um there it's certainly in a down the furniture business is is a substantial part of the business and the entire industry is off 20 25% because when people don't move they don't buy furniture generally that's an interesting point that's I hadn't put that puzzle piece together why High interest rates what affect Furniture like that and then what does the balance sheet look like do you have any debt on the balance sheet sure well I got I'm I'm carrying a ton of inventory I mean the reality is which is what took me a while to figure out if I went to just do a conventional sale for I don't know three times eida three and a half times eida I have so much inventory i Now understand that people make as much money having going out of business sales as they do selling the business because I got a lot of inventory if I had no inventory that would be another story and so when you think about an exit plan for yourself what are your to the extent you're willing to share what are your personal financial goals for for such an exit um I own all the real estate state so I'm in good shape right so the issue is I have no interest in retiring but I do need an emergency plan in case something happens uhuh so just to be to be clear um like when you think about a sale of the company uh like are you trying to achieve a fair market value uh you know like selling it to a to a trust let's say for a fair market value or that that's less important to you because of you know you're comfortable and you have the real estate I would say that's less important uh right I that I I just I don't need the cash out at this point so I don't want to just squander it all but I'm getting the highest value of it is not number one number one is I want to make sure that I can keep my employees uh gainfully employed and get into retirement if if and this is the big word if I can do that because I don't believe there's any guarantee to any of this that I could come up with a plan and so I I just want to give it my best shot to do the best I can with making sure that when I'm out of the picture my employees still have jobs and can continue on and um selling it to if there was someone in private Equity out there that wanted it the chances of them messing it up are extremely high as far as I can see because uh I know the way it operates and I want no part of that okay so this was this was super helpful and um the you know on its face kind of after this this short round of of questions you know you seem like you you check a lot of the boxes that we're looking for when uh we're thinking about whether someone might be a fit for a purpose trust or an employee benefit trust or employe ownership trust and uh so some of those boxes um you as an owner are the sole owner so having one decision maker one owner to work with is is a lot easier than having 10 or 20 or 30 people who you need to or two or two or two total eight the if it's two it's often a couple which makes it a little easier but um not always and so then it sounds like you're you're flexible both on the amount and timing of a perspective payout for the equity you own in the business AB yeah and that's important it sounds like you are very kind of purpose-driven in your commitment to maintaining a great workplace for employees a good place to work where their jobs are secure where they're happy to come to work every day and having that kind of uh that why and that purpose orientation is also a criteria box we look for yes and then it sounds like uh in terms of the business performance it sounds like you know maybe uh a little rocky since uh interest rates went up uh but generally positive uh you know slow to moderate growth uh but that's okay in your industry at this point um and you know uh maybe profitable maybe sometimes closer to break even but you you know you're not like hemorrhaging cash or anything no I've been through I've lived through six recessions September 11th whatever I mean I so this is a normal cycle for me it's no big deal so I think what you're what you're looking for and tell me what I'm missing or if I'm right or wrong is uh you're really at the Crux of it is is a kind of a like an ownership governance uh leadership solution less so than like a financial solution for yourself you want the to exist ongoing if you get hit by that bus tomorrow um or in 10 years and uh you want employees and the folks who work in the company to kind of have that security and the knowledge um and the knowhow of perpetuating that company on their own um you know after Jay moves on is that right yes but you're leaving out one big word which is another reason why the ESOP thing did not does not sit well with me flexibility I need flexibility cuz I don't know what's coming I mean people laugh when I say this I got a 12-year-old grandson uh in 20 years I'll hopefully be around I'll be 88 maybe my 32ye old grandson want maybe my 27y old granddaughter wants to take it over like I don't know there's that right maybe someone comes along and says oh this really fits we want to give you8 zillion and I think oh with eight zillion dollars I could give all my employees a really big bonus and that's okay I I don't wanna I don't want to do anything that I'm gonna wake up one day and go what the hell did I get myself into so I need to stay flexible I like I said I don't want to because the upsides of doing this are not big enough to cover the downsides because the other one of the options is to do nothing yeah which is an option right and that's a better option than doing something that's going to tie my hands one day day and have me say oh my God what did I do to myself here cuz I've managed to avoid all of that for all these years isn't I don't have a partner I don't have landlords I mean I've I've managed to get myself in a place where I have control over things as much as you can so so quickly just summarize for me uh that what you see as the downsides of doing nothing like why not just do nothing okay that's an excellent question the downside of doing nothing is something happens to me and all of a sudden my wife's left with this business I got three kids n none of my kids have the interest in to to go jump in and take this thing over so the reason I like to do this you you already brought up it's putting an infrastructure in place that will at least give a good shot to having the business continue on without me here and without that in place I'm going to have a lot of crying and screaming and what are we going to do and no you should do this and I don't want to leave I don't want to uh it's an insurance policy I want to leave some structure in place as best as I can that at least it's already in place everything Clicks in and it continues on and doing nothing that's not going to be the case yeah that makes a lot of sense you know a purpose trust or an employe ownership trust it makes it possible for business owners like like you Jay to sell or transition the ownership of the company in a way that kind of maintains the company's um kind of existing setup it maintains the purpose and values it perpetuates its independence you know people always ask like what what uh what's different under a trust and the the answer is a bit anticlimactic it's like well actually not that much uh but that's the point because the counterfactual never came to pass the sale to private Equity or the owner passing away and the business getting shut down you know uh before it's time uh and so what you're doing is protecting against that that counterfactual which is not as good as just kind of continuing as is which is uh for a good business like yours that's a that's a great thing that to be able to continue as is and so what trust ownership does is it solves this problem it like how can you sell your business with without quote unquote selling out and the flexibility you talk about is another key Hallmark of the trust structure versus other Alternatives however uh it's not completely flexible and so one one thing to be aware of for example um and I just want to get your quick reaction to this um a purpose trust is not an eligible shareholder in an es Corp so one thing you have to do is transition to that C Corp structure um and for you know most clients we work with that's that's not a problem we figure it out we work through it but for others um you know there's a lot of hesitation around that and um I'm just curious to get your quick take on that to go to a C Corp um though I have an accounting degree I've never practiced I presume that causes some tax issues doesn't it so you know it introduces that kind of uh quote unquote double taxation that additional layer of Taxation where you have corporate taxes uh and then you're still on the hook for your personal taxes uh kind of one difference is your whatever your personal tax rate is uh let's say in the in the 30s currently the the C Corp corporate tax rates at the federal level is 21% and then one difference is that a distribution to you from an es Corp is going to be taxed at your ordinary income rate whereas a dividend from a C Corp uh is going to be taxed at that uh long-term capital gains rate one consideration that we always work through with clients is what does it mean to transition to a C Corp both for the business but also for the for the owners um in terms of uh you know their bottom line uh you know there are of course benefits to a C Corp that may or may not be relevant to your business but um for example you can more easily issue multiple classes of stock if you ever wanted to um you know raise any non- voting uh preferred stock let's say from uh you know investors or customers and that that may not be relevant to you i' put that on the category of blah blah blah blah blah yeah not happening not relevant to me whatsoever to summarize just my my take it's like okay you you check a lot of the boxes there are some boxes I have question marks on and uh you know if if I were to you know work with you uh and when I work with clients like you um we typically would have to do a little bit more of an in-depth look at what we call visioning and viability so if we were to do this what would the vision be uh you know what would that governance look like um what would the trust purpose be what would the objectives of the trust be um how would we uh solve for things like you know leadership succession what would be the cultural impacts and then we look at the viability like financially what would it mean for the business what would look like for you how would that C Corp transition affect us um and those are some of the questions we would investigate more fully and then at that point typically we say Okay um now we know what it would look like from a vision standpoint we understand the viability from a from a financial and legal standpoint do we want to implement this and uh then you know owners would typically say yes or no but we don't we don't even start the visioning and viability phase until we understand that a client kind of checks enough of those boxes which based off this this short conversation so far I think you do but um I'll open the floor up to you now Jay what questions do you have before Jay starts can I just clarify one thing Peter you said you'd want to talk about what the purpose would be uh we did talk about that a little bit Jay stated that his purpose is maintaining the business as a place where his employees could continue to work if that's the purpose is that enough or do you need to you know more of a save the world type purpose to to work no I mean that's that's the beautiful thing about these purpose trusts or these employee ownership trusts is they're extremely wide open and flexible and how broad or narrow you want them to be and you can make the purpose very simple and down to earth or you can make it lofty and Patagonia esque but you know just uh saying we want the purpose of the trust to be to you know continue this company so that employees have a have a secure place to work that's totally enough and then you can have subobjectives that you outline if if you feel uh you know that would be beneficial so Jay you got questions yeah I do not believe that every business owner owes it to their employees to make sure this business goes on for their benefit I fully I believe everyone needs to do what's right for them and if you can in my situation I most certainly want to do that in my situation but if I needed that money to retire that might be another story so I'm not on some advocacy thing here of everybody should uh hand their business over to their employees not at all on the same token it would be a shame to have my business crumble simply because I didn't do everything I could to try to make it viable if when I'm not here so it's it that's why I throw in the word all I can do is try to make this work and um Peter to your point with there's no guarantee with all this stuff all somebody can do is do it and hopefully it works out right but there's way too many variables to think that there is some 100% cure to this problem and oh if you do this you're good to go that is hardly the case so I want to give him my my best shot so it seems like this solves my one problem of my wife says to me what happens if something happens to you my my father-in-law died at 67 you know um pretty suddenly uh what happens I don't have any I said yeah you're kind of screwed I I at the moment I mean it's not a I do not have a I don't have anything in place so I don't see any problems so far with this um do you have any questions I don't know you know it took me a while to figure out why the ESOP didn't work for me I I'm not sure I understand enough about this as to what could go wrong with this if in fact here here's a simple question I'm under the impression this is completely flexible I can do whatever I want you I can give exper % to whomever I want how many years totally my game plan versus that's absolutely not the case with an ESOP there's heavily regulated you have to you know non-discriminatory to different employee blah blah blah blah so I'm under the impression that I can write my own plan with this and it's all quote unquote legal is there some restrictions that I don't know about that that if I went to sit down you say oh no Jay you can't do that what what can't I do with this so you can't uh continue as an es Corp if you want a purpose trust okay got it correct me if I'm wrong difficult to borrow from a bank if you do this you know that depends so the uh it depends on on your existing balance sheet A bank's going to look at it like any other company and if it's an underwrite um loan uh based off the strength of your balance sheet and your cash flows and your projections uh then they'll underwrite it it doesn't you know for them the the the owner doesn't matter if it's Jay or or you know or are trust well I just have to correct you on that I can assure you just in my situ they still I personally guarantee everything and while the lawyer go oh you should stop doing that well great but I can't I mean I my balance sheet obviously isn't strong enough to be able to go ahead and like I said most of the equity is in the real estate which is not in the business so they're still asking for my personal guarantee so I'm of the belief that this would be difficult to go out to my same bank and get the same credit line I have now if I wasn't signing for it so I would only do this with the knowledge don't count on getting money from the bank so yeah that was my next point which which you're totally right on if um you're currently personally guaranteeing these loans and kind of that's a requirement for the bank then you or someone else will have to uh continue to personally guarantee those loans I I mean I've seen a couple exceptions in my time where um the banks have accepted a guarantee from the trust and of course the only asset the trust holds is the stock of the company and so they're pledging that stock is collateral but most banks aren't interested right okay so that so if I did this this isn't today I plan this out and by the time I do it I'd make sure I'm totally out of debt and I can get past the C Corp thing no problem I can get past the bank thing no problem one of the goals of this would be not only to put an infrastructure in place to try to keep the company going but I certainly would like to put an infrastructure in place that I can start to bonus people out and have a structure for transitioning and like I said flexibility the problem is I don't know whether you know how life is I know 82y olds that are playing tennis every day and act like they're 40 and they're perfectly fine and I know some 82 year olds don't don't know what their name is so I who knows what you know the next 10 15 years going to bring and that's a difficult thing to try to plan around there are a couple of other questions that um are are worth getting into but but I want to bring Jimmy into this conversation Jimmy correct me if I'm wrong uh I believe you are well on the way to selling your business to an ESOP I think you're at 30% is that right we're currently at 12% oh okay we bought out a minor shareholder um with the understanding that the the the next liquidity event will happen in 2026 so having made that decision several years ago what do you think listening to this conversation what reaction are you having to it well it was interesting that um I listened to the podcast a couple weeks ago and I was really intrigued and then Peter and I exchanged a lot of different uh emails no slack on the 21 hat sounding board I believe you had that conversation Jimmy that is indeed true and so after going back and forth on that I was uh very intrigued and I thought well you know this could have been a significant um opportunity for me as an owner to use this as a as a tool to to exit the company and subse ly since I've been listening to him here talking to Jay he's completely talked me out of that idea for a lot of different reasons why is that so um first of all we are already corporations it's not a big deal we pay the corporate taxes and California taxes so that's not not a big deal but one of the things that has stopped me from do this is that subsequent sale so one of the things about being in ESOP is there's a trustee who represents the employees and so the employees and or the trustee can turn around and sell the company anytime they want for a great windfall for the employees once they have that amount of shares of stock so for instance if I sold the company for instance for $10 million and someone were to I don't know three or four years from now we get a couple nice big contracts in the door and the company's now worth a100 million the employees can then choose to sell their $10 million company for $100 million and retire extremely wealthy uh whether or not they continue on with the business or not so they get that windfall at the end that's impossible to do with an eot as far as I can see because that whole idea is Perpetual trust and so it can never be sold um subsequently to anybody else let let me stop you there Jimmy that's really interesting I I know a number of EOP owners who describe the situation you just described as kind of their biggest nightmare they don't like the idea that they would sell the business to the employees um and then the employees would turn around and and sell it for lots more that wasn't the reason they created the ESOP you're saying it sounds like that wouldn't bother you is that right that would not bother me in the least bit I'm doing it to protect my employees in fact it would benefit me because I'm going to end up taking back a significant amount of paper uh to finance this ESOP uh buyout and by them reselling the company it takes me off the hook I get all my money straight up I don't no longer have to finance it because that's part of the the money that they would have to put in the deal is to buy my note out but but your business goes away it's not it's operated by private Equity or somebody else and you're okay with that I'm totally okay with that because the the employees at that point would be you know doing they would be killing their own jobs not me which just shows you that there's no right or wrong to this what he said makes perfect sense for you I totally understand where you're coming from in my case I don't think that there there is someone going to come along and and give a zillion dollars to the company so it's not even an issue for me but would it bother me like like Lauren just said like a lot yeah I I I suppress the value of the business so I could keep it in business for the employees and they turn around and sell it for I I can see where a lot of business owners would say wait a second I did this to be nice to my employees and now I gave away from my family or Charities I would have given to or to key employees I would have given it to all of a sudden I just gave away this this big asset and then they decided what to do oh no no Jay Jay I didn't give it away I sold it no no I I no no but but but it you could have sold it at a suppressed value versus what if in fact they could turn around and sell it for 10 times more in a few years I'm just saying no no I'm in a few years but I would have to keep it and I would have to continue running it and I would have that risk going forward so the the point is you know I I'll give myself a sh Shameless plug here but my company's just celebrated its 10th consecutive year on the Inc 5000 fastest growing companies in America so we are growing at an average of 23% a year for the last 13 or 12 years so it's going to if we continue that Trend we are going to continue to grow um and potentially grow and um it will be worth a lot more to somebody else in the future but I'm okay with that I'm walking away I totally I understand I I'm not I'm not in that situation at all I'm not even close I I so we're in a very so I say for you it sounds like you you absolutely did do the right thing and it makes sense it depends on lots of factors there's the business situation your personal situation there's just a lot of pieces to this Jay I want to follow up on one of those factors that that you mentioned um Peter when Jay was talking about it he was referring to an ESOP that he was kind of assuming he might have to sell it at a suppressed value if he did it as an employee ownership Trust would he similarly have to take uh less uh than he might otherwise if he sold to some you know someone else on the open market uh so uh totally uh Company by company the I would say most clients that we work with they sell at a quote unquote fair market value and that fair market value is probably not the highest value it's it's not it's not like what that that perfect strategic acquir would come in and and and say we really want this puzzle piece we're willing to pay a premium for it but it's you know it's what you would get if you were to go get a third party fair market valuation a third party appraisal most clients sell their company to the trust at in that range uh of of what fair market sometimes they take a bit of a discount sometimes they gift part of their um company to the trust to make it more affordable uh for the company to buy them out and also because they don't need the money and sometimes we have gone a little more in the premium range where the owners have have said you know we got this offer from private Equity we essentially want to match that when we're doing this trust transaction so it it really varies but again it's a goes back to the financial viability of the company their cash flows what they can afford over what time period and what the owners are willing to accept um so that you know becomes a spreadsheet problem it does appear that if money is your number one thing I'm not sure any of these things it seems to me if if getting the most amount for your business is your number one priority that and my guess is you'd be best off putting it up for sale and then to your point some company the Strategic buyer who's already got he's already in that business can strip out a bunch of overhead it would be way worth more to them than it would be to somebody else that if that's your number one goal you probably should just go sell your company in the highest B well if you can you know some some companies might not be able to no no for sure I'm saying if you can yeah for sure so what I have the way I structured it Jay since I'm doing the financing I also get warrants to participate in that future sale down the road so I am going to get that higher valuation somewhere down the road if indeed the employees uh were to uh sell it to an outside entity so I'm basically giving myself um a second bite of that apple as if if they were to sell it down the road somewhere and the reason why I'm going to do that is because I'm taking the risk of the paper and holding the paper at and they're going to pay me a a slightly less uh interest rate as they would from a bank um and and by doing so then I have some risk and and and some give back to the compan so when they're in their trade off is they're going to give me back warrants to get that second buy of the Apple if they were to sell it to a strategic buyer down the road so I'm gonna get I get both sides of this so Peter Jimmy explained why he would is happy that he chose uh an ESOP instead of uh an eot does that reasoning make sense to you yeah want to talk about a few things Jimmy said so first of all I agree with Jay many ways to to you know slice the Apple different structures or work better for different folks it sounds like an ESOP I think esops are great I I don't want to be the anti- ESOP guy I'm not the anti- ESOP guy I think they're great for certain companies for certain owners they're not for everybody um but just just to address a few things because I I want to make sure we're all clear so can a trust owned company be sold that was one thing that Jimmy brought up and the answer is yes it can be sold so because again the trust agreement which is this which governs the trust the trust is a stand in for the owner kind of outlines you know how the trust is going to treat its assets and the asset being the business in this case so most times the founders the owners they don't want the company to be sold in the future that Jimmy's correct about that they like they're interested in Perpetual Independence um because they think that the maintaining their Independence is a critical piece of being able to achieve their purpose and their mission in the world and they're worried that if a third party owner came in that you know whatever it is that they're working on whether that's employee wealth building or a you know a sustainable supply chain or you know uh saving the world in patagonia's case um saving the environment then that that a third party owner might not be beneficial towards those goals but that said typically of course we don't want to close the door so typically there's language such as you know if a sale of the company would be in the best interest of furthering the purpose then the trust stewardship committee may vote to sell the company under such circumstances and maybe you require a super majority vote in that case but you could you could even say whatever you want you could say in an employee ownership trust if selling the company would you know be to the benefit of the employees at the company um in terms of maximizing their you know uh their wealth or however you wanted to say it then the the trust may decide to sell the company if such an offer were to come along so that that that is possible although I would say that most times in the trust agreement uh the owners we work with make it kind of hard hard to do and they also put in a poison pill so to speak where no one is incentivized to try to sell the company like no one would you know personally get rich from selling the company so sometimes you see these poison pills that say you know after paying our debts and obligations Etc um any remaining proceeds from such a sale will go to Mission um aligned Charities okay so so far so good then I think again that was more flexibility great so tell me what could be something that I would wake up and go oh wait a second I didn't know that I'm sorry I did this because so far you've haven't said anything that I think oh that's bothersome I so far so good am I missing anything I was just at a conference in DC a couple months ago where there was a gathering of practitioners and and lawyers and and you know company owners in the eot PPT space and there's this kind of debate happening of you know should we you know kind of fight at the legislative level or Advocate at the legislative level for similar tax benefits to an ESOP um you know to incentivize the creation of these employee ownership trusts in these purpose trusts and there's a um a large contingent I would say maybe a majority of the people in that room at least that said no we should not do that because if you get those tax benefits with that will come the regulation the oversight that you know esops have uh like that's the trade-off that's why the government they say you want these tax benefits great we're going to regulate you in a certain way and so uh because we know that flexibility is Paramount for kind of a lot of the companies that are interested in the structure you know wishing for the tax benefits might actually not be what what they actually want when they think about it that makes perfect sense to me I was holding my breath waiting to hear what the majority I was thinking are they crazy but no that makes perfect sense that's exactly why the employee ownership trust has an for people like me it's different to go ahead and and get the regulatory thing well now you're back to like uh baby ESOP what's the difference Peter one thing we haven't discussed is if Jay sells the business to an employee ownership trust where does the money to pay Jay come from what are you imagining would happen well so uh the most flexible and simple structure is to do a seller note where the business pays J out over time from company cash flow the other kind of common structure we see is what we talk is what Laura did on that previous podcast Laura from local oceans where she did one 50% uh from a from a bank loan um so she got some initial liquidity and then the other 50% she held as a note to get paid out over the subsequent 10 years so usually either just a seller note or a combination of seller note and external debt is what we see we have also done deals with external Equity but those are much uh less common so let me tell you what the key to that is in my particular case but not just me there's lots of people in this situation I don't plan on retiring so let's just assume that I'm perfectly healthy until the day I drop dead okay now the issue then is what happens in the day I drop dead well if this wasn't in place my wife and kids would have the incentive to wash their hands of this say just sell the business or have a going out of business sale I don't want to deal with it the difference is if this was in place and was able to pay back the seller which would be my family okay they're going to get their money they just might wait for five years but that's okay and I do want to speak to something Jimmy mentioned it sounds like Jimmy has warrants in case of a future sale post ESOP to someone else which is cool we talk to owners and and they they they say to us something similar they say well you know if there's some if the company keeps growing really well and want to like participate in that upside and so some ways that we've tackled that is there's been a couple so one we've structured earn outs as part of their buyout so that um you know the the amount they get paid out will vary based off company performance over um you know the coming years the other is a phased sale so you know let's sell part of it to the trust now um and then part of it in in seven years when we think we're going to have higher Revenue higher earnings we'll be worth more we'll use a higher valuation at that time so those are you know two ways that owners you know if it's important to them can can participate quote unquote in that upside um that's kind of compatible with the trust sale I mean if the reality is and I didn't know this until you just said it Jimmy that you were growing it I didn't realize that all this time we're in very different situations so it doesn't make sense that we'd both have the same solution because we are in very very different situations so in your case it does sound like the eso's a great solution in my case my two options are do nothing or do this and it seems like doing this might be the best op weop or the weop which is right that's still on the table too the weop where I take a few key employees and I work a deal with them um that that's a good point so that's one of my options at the moment Peter Jay uh asked you a couple of times about what doesn't he know what could go wrong and I I want to ask it a slightly different way which is this there aren't that many of these employee ownership trust you gave me the number the last time you were on was it around 50 is that what you said around 50 of the you know purpose trust to use the more broad term yeah so my question to you is is there a big enough sample size do we know what can go wrong with these or is it too soon to to answer that question really so I'd say that well first of all there's 50 in the US there's a lot more uh in Europe of course that's different set of you know laws and rules but like roughly the same in terms of structure and it's been um going on for much longer there uh I do think your question you know has Merit like you know what are we going to think of this landscape in a decade two decades to that point I don't necessarily want to call it a risk but like a question for me is uh how do these self-governed companies that are stewarded by the people who work there and by you know a trust stewardship committee comprised of who's ever on that committee and that could be existing employees it could be the founder while the founder is still alive it could be you know an independent person kind of just like a a normal board might be but how does that self-governance go uh after that first generation of leadership turns over but then that second generation that third generation like how does it persist and evolve in a way where companies can continue to you know not get stale continue to um grow and Thrive and be flexible and Nimble and um my my inkling is that that's going to be less about the trust structure and more about the actual company culture and and more specific to the company that's a question I have the point is none of this is foolproof I mean it just isn't Jay I wanted to ask you did did your heart skip a beat when uh when Peter used the term stewardship committee no because I've real this is It's All About options the other option is I keep doing exactly what I'm doing and there's no committees but I know that's not a good long-term option for the day after I'm dead so I recognize that I can't have it both ways that that I could be ignorant like I'm going to guess 75% of business owners which is why businesses just disappear one day I could stick my head in the sand and say I'm not doing anything and drop dead at my desk and leave a nightmare for my wife and kids or I can do something that has some stewardship so no I didn't cringe when I heard that word because I recognized that that's part of what I need but not too much of it so Lauren you should at this point in time you should ask Peter what should an owner expect to pay for an eot yeah there's a great question Peter there we go Peter you still there yeah I'm still here uh it is a good question so uh I mean to uh Jimmy's point we we encounter different types of clients we encounter clients who want to who are very kind of capable and interested in a more DIY approach and then we have folks who are um who aren't they they're either very busy running the business or they just you know um they don't feel they have the the knowhow or or interest uh so they want more of what we call kind of um a concierge service with someone that really guide them every step of the way and project manage their whole transition so that really uh that really changes the fee structure from a from a Consulting perspective for a consultant like myself who might help with the transition but in any case you're GNA have legal fees and CPA fees um and then you'll have ongoing administrative fees so for legal CPA um depending on the complexity of the deal structuring and the financing plan you know we typically say budget 15 to $30,000 for the transition and then for the Consulting fees if you're going DIY to concierge uh you know budget anywhere from um maybe 15 to to $60,000 and that time frame we're talking about is we say budget six months the at the minimum from like we're starting this process to we're actually having a transaction that is way more reasonable well that seem I have to tell you I wrote down numbers before you said it that I right in my ballpark I think that's very reasonable and makes sense absolutely I kept you longer than I promised I appreciate you're hanging in there this was really interesting my thanks to Jay goz Jimmy cowb and Peter kler have a great week everybody one thing before you go everything we do at 21 hats is created by entrepreneurs for entrepreneurs to help us all learn together if you get something out of listening to these podcast episodes consider joining the conversation you can do so by joining the 21 hats sounding board a slack Channel where you can tap the wisdom of a very smart crowd or by becoming a founding member and joining our monthly Zoom Forum where you can be part of conversations much like the ones we have on the podcast you can sign up for both by subscribing to the morning report if you have any questions you can email me at Lauren ln21 hats.com and if you get some out of this podcast or out of the morning report please tell a friend tell an enemy tell every business owner you know your word of mouth owner to owner will always be the most effective way to build this community for all of us thank you it means a lot this episode was produced by another entrepreneur Jess staron founder of blank word Productions thanks for listening everyone [Music]